Wrongdoing in insolvency: part 5

This week we continue looking at the provisions of sections 216 and 217 under chapter X of the Insolvency Act 1986. Although designed to deal with the "Phoenix" syndrome as referred to last week, the provisions are in fact rather wider than that and any argument that because none of the features of a Phoenix syndrome apply that the section is inapplicable will fail. A good example of this is the Court of Appeal case of Ricketts v Ad Valorem Factors Ltd [2004] 1 BCLC 1. The facts of the case were these. On 2 March 1998 Mr Ricketts became a director of Air Equipment Co Ltd ("Equipment", which had changed its name to this on 3rd February 1998). The general geographical area of the business of the company was the West Midlands, and the product area was air compressors although the precise product was apparatus and tools. Mr Ricketts had been a director of a company which had gone into insolvent liquidation on 10th of February 1998. That company, Air Component Co Ltd ("Component"), although it dealt in providing parts for air compressors rather than apparatus and tools operated in the same geographical and product areas. Equipment was thus no Phoenix company, since it was in existence at the same time as Component. Ad Valorem Factors Ltd, as one might expect, was a factoring company which thus took over debts from creditors including creditors of Equipment. When Equipment went into insolvent liquidation in October 1999 among the debts was one of approximately £6,500, which was owed to the factoring company Ad Valorem which had taken an assignment of the debt. Ad Valorem brought the claim against Mr Ricketts on the basis that sections 216 and 217 applied since, given the similarity of names between Equipment and Component, Equipment was thus a prohibited name, and that since no leave of the court had been given to Mr Ricketts to act as a director of Equipment he was personally liable for that debt (and of course, if this were correct, he would be personally responsible for all sorts of other debts).

At paragraph 9 of the judgment, Lord Justice Mummery dealt with the procedure under which directors apply for permission to act as follows: " Chapter 22 of the Insolvency Rules 1986 (the rules) governs applications for leave to act in relation to a company with a prohibited name and also prescribes exceptions as to when a person may act without such leave. The present case does not fall within any of the three exceptions prescribed in rr 4.226-4.230. (Insolvency Rules 1986) It is, however, relevant to note two points on the rules: first, a director may continue to act without the leave of the court, if he has applied for the leave of the court within 7 days from the date on which the company goes into liquidation; secondly, by virtue of r 4.230 (Insolvency Rules 1986), the leave of the court is not required where the successor company referred to in s 216 (3) has been known by a prohibited name for the whole of the period of 12 months ending with the day before the liquidating company went into liquidation and has not at any time in those 12 months been dormant.".

It was common ground between the parties to the case that the original purpose of the section is was to deal with the so-called "Phoenix syndrome". The court accepted that this was not that type of case given that: no creditors of either company had been misled by the similarity of the names or the position of Mr Ricketts as director; there was no transfer of assets at an undervalue by Component to Equipment; neither company had apparently been operated so as to run up debts and to avoid their payment. Nonetheless the view of the court was that the section is meant what it said. If the name is properly construed as prohibited, the mere fact that the vices of the Phoenix syndrome were absent was neither here nor there. The view that the court took was that although there were severe penalties for breaching these sections (criminal liability as well as personal liability for debts) the position was that a director could either resign or make an application for leave and if the director failed to do so then the director could have no cause for complaint.

As to the applicable test, whether the name was so similar depended upon the circumstances. The court felt that Equipment was a name which was so similar to the name of Component as to suggest an association with it. Similarity fell to be judged in the context of all the circumstances in which the names were actually used or likely to be used, the types of product dealt in, the locations of the business, the types of customers dealing with the companies and those involved in the operation of the two companies.

Another point which the decision established was that if the name was prohibited, then the court had no discretion in the matter of the personal liability of the director. However harsh the application of the section in the particular case might seem to be, on its true construction once the section was held to be applicable the specified consequences automatically followed.